Hero Motocorp Ltd
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Hero MotoCorp Ltd. BUY Target Price ₹4054 CMP ₹2979 FY18E 14.4x Index Details Hero MotoCorp (Hero) is India’s largest two wheeler manufacturer. Sensex 25,400 Of the top five best-selling motorcycles in India, four belong to Nifty 7,759 Hero’s stable, viz. Splendor, Deluxe, Passion and Glamour. Hero, a BSE 100 7,810 market leader, is a debt-free, cash-rich company operating on a Industry Auto negative working capital cycle with superior return ratios. We are positive about the company’s prospects given that: Scrip Details Prospects of the domestic two wheeler industry are expected Mkt Cap (₹cr) 59,495 to improve (CAGR of 11% in FY17-18 from CAGR of 2.4% BVPS (₹) 449.7 during FY12-16) with the pick-up in economic activity, O/s Shares (Cr) 20.0 government’s thrust on rural area development and favorable Av Vol (Lacs) 0.4 demographics. 52 Week H/L 2987/2252 Hero is expanding its annual capacity from 7.65 mn units to Div Yield (%) 2.0 nearly 10 mn units by FY18. Given the capacity expansion and FVPS (₹) 2.0 improving industry prospects, we expect Hero to report a 3 year revenue CAGR of 10.1% to Rs 36,751 crore by FY18E. Shareholding Pattern Hero has been able to maintain a leadership position in the Shareholders % two-wheeler segment despite stiff competition on the back of Promoters 34.6 higher warranties, established distribution strength and Public 65.4 increasing spends on R&D. Total 100.0 We expect the EBITDA margin to expand to 16.8% in FY18E STOCK POINTER from 15.5% in 9MFY16 led by operational efficiencies derived from its ‘LEAP’ programme and relatively lower raw material costs. Hero’s exports have grown at a healthy pace and have helped Hero vs. Sensex 30000 3500 de-risk the business model to a certain extent. 29000 28000 3000 27000 26000 2500 We initiate coverage on Hero as a BUY with a Price Objective of 25000 24000 2000 23000 ₹4054, representing a potential upside of 36% over a period of 18 22000 1500 21000 20000 1000 months. We have arrived at our target price by assigning a PE of 20x 15 15 16 15 15 15 15 16 15 15 15 15 - - - - - - - - - - - - Jul Oct Apr Jan Mar Jun Feb Sep Dec Nov Aug May to FY18E EPS of ₹203. The assigned PE is at premium of ~15% to its BSE_SENSEX Hero MotoCorp (RHS) 5 year median forward multiple of 17.5x. The premium assigned is reflective of the anticipated expansion in margins, superior return ratios, leadership position and strong balance sheet. Key Financials (₹ in Cr) Net EPS EPS Growth RONW ROCE P/E EV/EBITDA Y/E Mar EBITDA PAT Sales (Rs) (%) (%) (%) (x) (x) 2015 27,538 3406 2363 118 12% 36.1 51.9 24.7 16.4 2016E 28,331 4461 3118 156 32% 37.3 52.1 18.7 12.4 2017E 32,900 5385 3618 181 16% 33.9 47.3 16.1 10.2 2018E 36,751 6181 4047 203 12% 30.3 42.2 14.4 8.7 th - 1 of 32 - Tuesday 05 April, 2016 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Company Background Incorporated in 1984, Hero MotoCorp (Hero) is India’s largest two wheeler manufacturer with a market share of 35% as on 9MFY16. It was promoted as a joint venture between India’s Hero Group and Japan’s Honda Motor. Amid rising differences, Honda exited the JV in a phased manner in 2010 and the company was renamed to Hero MotoCorp from Hero Honda. Hero has 4 manufacturing plants, 3 located in Haryana (Dharuhera and Gurgaon) and 1 in Uttarakhand ((Haridwar) with a combined capacity of 7.65 mn units as on FY15. Post the capacity expansion in Neemrana and Halol, Gujarat, Hero’s capacity is slated to reach nearly 10 mn units by FY18E. It earns majority of its revenues from the sale of entry level motorcycles ( 75-125cc). Hero MotoCorp manufacturing locations Haridwar plant : Daily capacity 8500 units Neemrana plant : Daily Gurgaon plant : Daily capacity 1250 units (in capacity 6500 units FY16) Dharuhera plant : Daily capacity 6500 units Halol, Gujarat plant : Daily capacity 5000 units ( by FY18) Source: Hero, Ventura Research th - 2 of 32- Tuesday 05 April, 2016 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Key Investment Highlights Hero holding fort amidst increasing competition Hero, India’s largest two wheeler manufacturer, has managed to hold on to its leadership position even as the industry has seen an influx of new players and models. Post, its split with Honda in 2010-11, market shares in the industry have seen substantial changes as Honda managed to capture market share from existing players through a spree of new launches and aggressive marketing. Despite, the changing industry dynamics, Hero continues to dominate the industry with a 35% market share as on 9MFY16, down 600 bps from FY12. Hero’s dominance in 2012 continues… …albeit at a lower share 5.0 India Suzuki, Eicher x Yamaha, 3% 2% , 1% 4.0 T V S Hero 3.0 Motor, 14% Moto, 41% 2.0 1.0 Bajaj 0.0 03 04 05 06 10 11 12 13 07 08 09 14 15 - - - - - - - - - - - - Auto, 25% - 16E - -1.0 2002 2003 2004 2005 2009 2010 2011 2012 2006 2007 2008 2013 2014 2015 Honda Two wheeler industry to GDP multiple Average Std Deviation -1 Std Deviation +1 Motor, 14% Source: CMIE, Ventura Research Source: CMIE, Ventura Research Hero has been able to hold on to its leadership position despite cut-throat competition on the back of: i) Higher warranty period: Hero offers a simplified and no-cost warranty for an extended period, unlike its peers. Despite the liberal warranty policy, Hero has managed to maintain relatively higher EBITDA margins vis-à-vis peers, except for Bajaj Auto, which has a dominant presence in the high end, high margin segment (>125 cc segment). th - 3 of 32- Tuesday 05 April, 2016 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Insurance Policy and EBITDA margin comparison Warranty Hero Bajaj TVS Honda Yamaha Policy Standard policy Basic coverage only Basic coverage only Basic coverage only Basic Coverage: 2 years coverage at no upto 2 years/30,000 upto 2 years, upto 2 years, or 30,000 kms whichever cost for all models kms, extended extended warranty extended warranty is sooner for motorcycles, purchased after warranty available at available at a available at a Basic Coverage: 2 years 13th April 2013 a nominal charge/ nominal charge nominal charge or 24,000 kms whichever Different models is sooner for scooters have different warranties Motorcycles 5 years or 70,000 5 years or 50,000 5 years or 60,000 Upto 5 years or 5 years or 70,000 kms kms whichever is kms whichever is kms whichever is 40000 kms whichever is sooner sooner sooner sooner Scooters 5 years or 50,000 5 years or 60,000 Upto 5 years or 5 years or 60,000 kms kms whichever is kms whichever is 36000 kms whichever is sooner sooner sooner Mopeds 3 years or 36,000 kms whichever is sooner EBITDA margin Hero Bajaj TVS Honda Yamaha EBITDA margin ( 3 year average) 13.1% 21.6% 5.7% 10.6% 9.1% Source: Ventura Research ii) Increasing spends on R&D: Historically, Hero’s spends on R&D were low because of the technological expertise of its partner – Honda. However, post split, Hero has increased its R&D spend from ~0.4% in FY10 to ~0.7% at present. The management aims to increase it to ~1.1% of sales in the coming years. With this, it is slowly catching up with the R&D spend of peers – Bajaj Auto – ~1.7% and TVS Motors ~1.9%. iii) Well established dealer network: Hero has a little over 6,000 customer touch points, including dealers and service centers, spare part outlets and dealer appointed outlets primarily located in the semi-urban and rural areas from where it derives ~45% of its revenues. th - 4 of 32- Tuesday 05 April, 2016 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Hero’s dealer and service centers close to 3K 3500 3000 2500 2000 1500 1000 500 0 Hero Bajaj TVS Honda Yamaha Dealers Service Centres Source: Ventura Research Revenues to grow at a healthy pace Hero’s revenues are expected to grow at a 3 year CAGR of 10.1% to Rs 33,405 crore by FY18, driven by the anticipated pick-up in demand and capacity expansion. Revenues to grow at a 3 year CAGR of 10% 38000 Rs crs 25% 36000 34000 20% 32000 15% 30000 28000 10% 26000 24000 5% 22000 20000 0% FY12 FY13 FY14 FY15 FY16E FY17E FY18E Revenues Growth YoY (RHS) Source: Hero, Ventura Research th - 5 of 32- Tuesday 05 April, 2016 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Two wheelers poised to grow at a steady rate India is expected to register two wheeler sales of 19.1 mn units in 2015-16, a 5 year CAGR of 7.6%. The growth momentum is expected to pick-up from here on with sales volumes expected to touch ~30 mn units by 2020.